Macroeconomic Overview

Dominica's gross domestic product (GDP--see Glossary) totalled US$88.2 million in 1985. This figure represented a 3-percent increase over the previous year and was consistent with the pattern that had emerged for 1982-84. GDP growth rates had averaged 11.3 percent per year for 1980 and 1981; however, these rates were largely achieved through substantial external aid provided in the wake of the devastating hurricanes of 1979 and 1980. Per capita GDP averaged US$1,132 in 1985.

The government made substantial progress in the 1980s in controlling inflation. In 1980 the consumer price index increased by 30.5 percent over the previous year. This increase resulted from shortages following the hurricanes, high wage settlements, and the effects of the second round of oil price increases on the international economy. The index dropped sharply to 13.3 percent in 1981 and then to 4.4 percent in 1982; by 1985 the rate of inflation was barely 2.1 percent. Favorable international trends, especially the easing of the rate of increase in import prices, and increases in domestic foodstuffs were primarily responsible for the improvement. The consumer price index increased slightly by 3 percent in 1986. Substantial increases in clothing, footwear, meat, fish, and dairy products were largely mitigated by lower fuel prices.

According to the 1981 census, Dominica had an economically active population of 25,000; 18.5 percent of this population was unemployed. Unemployment was particularly high among the 15- to 19- and 20- to 24-year age groups, with rates of 55.7 and 23.8, respectively. The two sectors contributing most to employment remained agriculture and government. Between 1978 and 1981, the number of workers employed by government decreased marginally from 5,751 to 5,433 or from 32.4 percent of the workforce to 31.9 percent. The decrease was more significant in agriculture, which employed 4,517 workers in 1978 and 3,294 in 1981, a shift from 25.5 percent of the workforce to 19.3 percent. During that same period, however, the number of farmers increased from 11,000 to 14,000. This possibly indicated that more agricultural workers became fulltime farmers in response to land distribution programs, improved farm credit, and stable banana prices in the late 1970s. Dominican wage rates compared unfavorably with the general levels found elsewhere in the Commonwealth Caribbean. In 1984 the minimum wage for a 40-hour week was raised to US$27.55.

Banking and Finance

Dominica was a member of the Caribbean Development Bank (CDB) and the Eastern Caribbean Central Bank (ECCB). The CDB provided financial facilities for infrastructure and development program activities either bilaterally or as a co-financing partner with the World Bank (see Glossary), AID, and other international agencies. The ECCB acted as a common central bank for the members of the Organisation of Eastern Caribbean States (OECS). Dominica and the six other members of the OECS have shared a common currency, the Eastern Caribbean dollar (EC$), since July 1976. The exchange rate has remained fixed at EC$2.7 per US$1.

The institutional arrangements of a shared common currency mean that decisions about exchange rates cannot be made by any one member nation. Given the differing production profiles of the OECS countries, the various national economic policy imperatives do not necessarily coincide either in objective, direction, or timing. When coupled with the difficulty of decision making within a regional institution, the arrangements concerning the ECD and the ECCB are major constraints on the effective use of the exchange rate as a tool of national economic policy. In Dominica's case, the constraints have led to the use of wage policy as an alternate tool of macroeconomic policy, a situation that can be domestically unpopular and can limit the ability of the government to direct economic growth. Throughout 1986 Dominica was able to mitigate the effect of a fixed exchange rate because of the strength of the pound sterling, the currency in which most foreign exchange earnings were earned.

Role of Government

In the 1980s, the Dominican government attempted to strengthen public finances, develop the productive capital infrastructure, and diversify agricultural production. On two occasions, the government entered into an extended arrangement with the International Monetary Fund (IMF--see Glossary) to accomplish these goals. Although the nation's stated development policy called upon the private sector to be the engine of economic growth, the government's involvement in key sectors of the economy remained strong.

Dominica entered into an Extended Fund Facility program with the IMF for the period 1982 to 1984. Under the program, the government reorganized public finances, eliminating subsidies to unproductive state enterprises, and expanded government revenues through increased consumption taxes. Expenditure controls were also introduced; the hallmark of this effort was the decision to restrict salary increases of public employees to a level below the anticipated rate of inflation. This decision appeared to influence the rate of increase of private-sector wage settlements.

In 1987 the Dominican government signed a three-year structural adjustment program with the World Bank. The adjustment program was expected to encourage policies and programs that would increase GDP through investment by the private sector. In preparing this favorable investment environment, the government developed a package of incentives for private investment that included the removal of export taxes as well as the foreign exchange levy, the termination of price controls on 40 percent of controlled items, and a substantial reduction in corporate taxes for eligible manufacturing firms. To stimulate diversified agricultural production, the government removed price controls on imported livestock products and took steps to revitalize export market development for fruit and vegetable crops. At the public-sector level, procedures for investment promotion were streamlined and located in one agency, the Industrial Development Corporation. Each ministry received technical assistance in project design, planning, and management of public-sector projects. The Economic Development Unit, the government's central planning body, was staffed with a multidisciplinary pool of technical experts. In addition, wages in the public sector were no longer to be raised automatically each year; wage negotiation guidelines were drawn up that were expected to help keep increases in the public wage bill to 3 percent per year.

In support of these policy reforms, the International Development Association (IDA) of the World Bank made available US$3.1 million in credit as a structural adjustment loan. In addition, the CDB was to provide US$2 million in parallel financing.

The IMF program of structural adjustment was entered into largely because of the failure of the private sector to lead the way in economic development. As a result, the government was playing a greater role in direct investment and commerce than originally had been intended. In the late 1980s, the government owned and operated a citrus processing plant, lime-producing estates, and an export-import company and remained directly involved in communications, transportation, electricity supplies, and commercial banking.

Communications on Dominica were fair. A subsidiary of an international company operated a fully automatic telephone system with about 4,600 sets. New radio-relay links to Martinique and Guadeloupe provided high-quality international service. The government-owned Dominica Broadcasting Corporation operated a radio station on 595 kilohertz. Radio Caribbean, with studios on St. Lucia, had a small relay on 1210 kilohertz and the Gospel Broadcasting Corporation had facilities on 1060 kilohertz.

The transportation network on Dominica was not well developed. The island had about 370 kilometers of paved and 380 kilometers of gravel roads. Road conditions were often poor, however, and many areas of the interior and northwest could not be reached by vehicle. A new small airport outside Roseau was completed in the mid-1980s, and an older, larger airport was located near Melville Hall on the northeast coast. The island had no railroads. Several streams were navigable by canoe but none had economic significance. Roseau and Portsmouth were the only ports.

Foreign Trade and Balance of Payments

Bananas accounted for 40.1 percent of Dominica's merchandise exports during the period 1980 to 1983. This product was followed by laundry and toilet soaps (34.3 percent), citrus products (4.3 percent), and all other commodities (21.3 percent). Exports totalled US$32.9 million in 1983. The overwhelming percentage of Dominican exports that year were destined for members of the Commonwealth of Nations (see Appendix B). Britain absorbed 43.7 percent of all exports, followed by the non-OECS members of the Caribbean Community and Common Market (Caricom--see Appendix C) (41.8 percent), and the OECS (7.3 percent). Only 2.4 percent of exports were destined for the United States. Trade restrictions within Caricom restrained the development of the manufacturing sector.

Consumer goods--consisting of foods, beverages, tobacco, oils and fats, and manufactured goods--represented 56.1 percent of merchandise imports in 1983. Food, beverages, and tobacco alone composed 24.5 percent of imports. Other major segments of Dominican imports were intermediate goods (chemicals, fuels and lubricants, and raw materials) at 21.5 percent and capital goods (machinery and transport equipment) at 18.3 percent. Dominica's import bill for 1983 was US$49.3 million. The United States supplied 23.1 percent of imports that year, followed by Britain (18.1 percent), the OECS (14.5 percent), and the non-OECS members of Caricom (12.5 percent).

Continued debt servicing obligations and trade deficits were the largest burdens on the country's balance of payments in the 1980s. In 1985 debt service payments on the country's US$48-million external debt reached US$5.5 million, some 15 percent of government revenues. Increased indebtedness was almost entirely related to accumulated project debt, virtually all of which was externally financed. Because of the need to raise money to service the debt, the health of the export sector was increasingly important. In 1985, however, the island's trade deficit increased to US$28 million, a direct result of growing protectionism in Caricom.

For more recent information about the economy, see Facts about Dominica.

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Source: U.S. Library of Congress